Gold, silver, pgms, mining and geopolitical comment and news

Agnico

Last year with precious metals, apart from palladium, falling short of projected values, our predictions and anticipated stock gains fell well short of expectations.

For 2019, we again anticipate relatively conservative gains in precious metals prices and continuing falls in general equities and bitcoin valuations.

If our predictions are correct, we could see a further recovery in precious metals prices and a sharp upturn in relevant stocks.

We are sticking in our stock recommendations to major precious metals miners and royalty/streaming companies as they are likely to remain comfortably in existence if metal prices move against them again.

In a presentation in London, Abitibi Royalties(TSXV: President and CEO Ian Ball put forward an ambitious slogan – To Build the Best gold company – not the biggest, Abitibi Royalties will never be that, but the Best in terms of stock appreciation, and it has a good track record of so doing since its inception as a spin-off from Golden Valley Mines back in 2011, although has been mostly underperforming its peer, and larger, royalty companies in the current year. It has a strong core asset in a 3% net smelter return (NSR) royalty on the eastern portion of the Canadian Malartic mine (owned and operated by Agnico Eagle and Yamana Gold), which includes the Barnat Extension and Jeffrey gold deposits. The NSR also includes the exciting new Odyssey North discovery that was announced in 2014 which gives it some good growth potential assuming these extensions to the Canadian Malartic property pan out as anticipated as the mine progresses from a large scale open pit to an equally large scale underground bulk mining operation as the pit section is depleted.

Ball describes the changes ahead as a ‘paradigm shift’ which may just be CEO talk, but with Agnico Eagle (which has some existing bulk underground mining expertise) the main driving force behind the change could just be an apt description. The new sections of Canadian Malartic, Canada‘s largest gold mine certainly have potential but whether they offer the paradigm shift Ball talks about is, as yet, unproven.

While the royalties in and around the Canadian Malartic property do underpin Abitibi Royalties’ earnings prospects, it also has an unusual (among royalty companies) policy of buying low cost royalties on ground held adjacent to known high potential deposits – mostly in Canada, but also a royalty in a big ground holding which almost surrounds Eldorado’s Efemcukuru gold mine in Turkey. The Canadian near-mine royalties include ground close to the Red Lake and Rainy River deposits. These royalties have been picked up at extremely low cost and even if only one of them comes good then that would be a potentially good investment.

Ball, a former associate of Rob McEwen, who himself is a major shareholder in Abitibi Royalties, says he does not take a salary from the company, but ploughs any earnings into buying additional stock, and also says he has no intention of widening the share base – currently around 11.3 million shares outstanding – indeed currently plans to reduce it by buying back stock with a target of bringing it down to 10 million shares outstanding over a three year buy back programme. Abitibi Royalties has a strong balance sheet with Can$7.7 million in cash and no debt. Its market cap is currently around Can$100 million, with a stock price of a little over Can$9 at the time of writing.

Royalty companies tend to be a relatively low risk way of investing in mining and Abitibi Royalties is no exception with its big underlying Canadian Malartic net smelter royalty underpinning earnings. It does have potential in terms of improving shareholder value, but remains perhaps more speculative than most of its royalty company peers due to unknowns in the tenor of some of the areas for potential royalty growth. A strong gold price should see it grow regardless, but there remains a downside risk from a weakening gold price – and if none of its prospective royalty growth areas pan out. But adding an additional risk element to a royalty company with strong baseline earnings could well have an appeal to less risk averse investors.

The best performing precious metal for the week was palladium, up 5.49 percent. Citigroup forecast that platinum could see a deficit of 172,000 ounces in 2016, but palladium’s deficit could be short by 847,000 ounces, thus the group is more bullish on the later.

Esturo Honda, who according to Bloomberg News has emerged as a matchmaker for Prime Minister Shinzo Abe in finding foreign economic experts to offer policy guidance, is opening his ears to Ben Bernanke. In April, Bernanke noted that helicopter money, in which “the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them,” could work as the strongest tool to overcome deflation, says Honda.

Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, says there is political risk building into the gold market, including the Italian referendum and U.S., French and German elections. Blanch adds that in the past, gold used to be driven more by the U.S. dollar and commodity market movements, but “in this day and age, it’s a new world.” He also mentions that one-third of government bonds are yielding negative. The chart below shows that $9.2 trillion of sovereign bonds are trading with negative yields.

Weaknesses

The worst performing precious metal for the week was silver, down -2.97 percent. With silver generally more volatile than gold, a strong rally in stocks, up 10 of the last 11 days and with new record highs, had investors chasing returns in the broader market.

Gold traders and analysts are bearish for the first time in four weeks, reports Bloomberg. The precious metal headed for its first back-to-back weekly decline since May, with gains in equity markets and the dollar hurting prices. David Meger, director of metals trading at High Ridge Futures in Chicago, says that the dollar’s strength continues to pressure most commodities, gold in particular. “Safe-haven demand has been diminishing, obviously with equity markets moving to new record highs,” Meger said.

A group of armed men stormed one of Agnico Eagle’s mines in northern Mexico early Tuesday morning, reports the Canadian mining company, injuring a security guard and making off with a haul of gold and silver. Last April a similar situation occurred when armed men entered McEwen Mining’s El Gallo 1 mine in northern Mexico, reports Reuters, even though thefts within mines are “relatively rare in Mexico.”

Opportunities

The World Gold Council and the Accounting and Auditing Organization for Islamic Financial Institutions are drafting new standards for investing in gold to comply with Sharia law, reports an Energy and Capital article. If the proposals for the changes (expected in the fourth quarter) are accepted, a flood of new investors could help send gold prices soaring, the article continues. A similar situation took gold prices to $1,900 in 2011 when surging demand came from China following the government’s urge for its citizens to own the yellow metal.

With the U.S. presidential election seen as the next big catalyst, Bill Beament of Northern Star Resources believes that gold’s rally is set to endure, reports Bloomberg. He says the overall trend is up and that “the U.S. vote will have more of an impact on bullion than the U.K. referendum.” The IMF also scrapped its forecast for a pickup in global growth, the article continues, yet another positive for gold.

Commerzbank raised its year-end gold estimate by $100, reports Bloomberg, to $1,450 an ounce. Similarly, DBS Group Holdings says that gold is in a major bull market and could surge past $1,500 an ounce as “low interest rates buoy demand and the U.S. presidential election looms.” The long-term gold price has been adjusted higher at Numis Securities as well, up to $1,400 an ounce from $1,350 an ounce. While it’s good to see the street starting to take their price forecast higher for gold, investors should remain disciplined as the late summer can be a seasonally weak period for prices and many of the expected price targets being raised are capitulation moves to higher price levels.

Threats

According to data compiled by Bloomberg, investors pulled $793 million out of SPDR Gold Shares last week, the most since November. As Citigroup’s U.S. Economic Surprise Index rose to its highest since January 2015 (a sign of an improving economic outlook), demand for ETFs backed by gold has diminished some. Holdings in gold-backed ETFs around the world fell 3.9 metric tons last week, reports Bloomberg.

Sovereign gold bonds issued in India were trading at a 27-percent premium over the fixed price when the bonds were first issued in November, reports LiveMint. Prices of physical gold have risen 23 percent during the same period. According to the article, “Investors get a fixed interest rate of 2.75 percent per annum on these bonds over and above the capital gains that may accrue if the price of gold rises in the spot market.” The gold bonds are part of the government’s gold monetization efforts aimed to “wean the public off physical gold.”

Will gold miners maintain their capital discipline? Bloomberg reports that as the price of gold rises to its best first half of the year in nearly four decades, earnings reports could indicate that miners are preparing to ease in terms of spending. “Historically there’s been a very high correlation, almost a one-to-one correlation, between costs and the gold price, implying that with higher gold prices you will likely see costs rise at the same time,” Josh Wolfson of Dundee Capital Markets said. Wolfson added that a majority of miners structured spending based on the assumption that gold will trade between $1,100 and $1,150 an ounce. Let’s hope the miners learned something over the prior three painful years of falling gold prices.